Goldman Exits ETF Market Making, Leaves You In Capable Hands Of “Lesser-Known” Firms

Ok, well this is notable.

Goldman is getting out of ETF market making.

I don’t want to try and spin this too much, because depending on which side of the argument you’re on, you can interpret this story any number of ways.

But the facts are as follows from Reuters:

  • Goldman is pulling back substantially from trading that helps backstop the fast-growing use of U.S. exchange-traded funds.
  • Goldman has told fund providers it is scaling back its role as a top lead market maker for ETFs and has already slashed the number of funds it supports in that capacity.
  • LMMs are critical to keeping ETFs trading smoothly.
  • Since last year, the number of ETFs backed by Goldman as a LMM on Intercontinental Exchange Inc’s NYSE Arca trading venue has plunged to 178 from 380, according to documents published by NYSE.
  • Lesser-known but deeply experienced trading firms have picked up some of Goldman’s former LMM assignments.

Again, I’m going avoid injecting too much bias into this, but what this invariably means is that you’re going to get a bunch of smaller players moving in to fill the void and they will, by definition, be HFTs.

That’s nothing new, but I am inherently skeptical of the entire ETF liquidity provision mechanism in the first place and although it’s probably going to be pitched as a good thing, the idea of “lesser-known” players stepping in to fill the shoes of a giant doesn’t make me feel any better.

Here’s what Douglas Yones, NYSE’s head of ETFs, had to say:

While some of our liquidity providers have narrowed their presence, it has opened the door for many more firms to enter the marketplace with positive results.

Yes, “many more firms” that probably aren’t subject to any kind of capital requirements and are loosely regulated.

Whatever. Make of this what you will, but the simple fact is that, as noted here last week, we have entered what Deutsche Bank calls “uncharted territory” for ETFs.

Inflows in H1 very nearly outstripped inflows for any full year on record, as $245bn billion poured into the vehicles.

ETPFlows4Squa

So you know, make up your own mind about how desirable it is for “smaller,” “lesser-known” companies to be making markets amid the influx of capital.

Of course as Reuters notes, these smaller players are “deeply experienced.”

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